How does a quit claim effect our tax situation?

1 answer | Last updated: Sep 14, 2010
Jo asked...

My husband's parents quit claimed their home to us because we have been caring for them for over two years. How will this affect our taxes--and can we claim them as dependents?

Expert Answers

Amy Shelf is an attorney specializing in estate planning and probate for individuals and families of all means.

How the transfer is characterized depends largely upon whether your in-laws intended to transfer the home as a gift or as payment for your caretaking services.

If the transfer is treated as a gift, then there are no tax consequences to you as a result of the gift itself. Your in-laws, on the other hand, may be required to file a gift tax return and, depending upon the value of the home, may have a gift tax due.

If the transfer is treated as payment for services, the value of the home could be considered taxable income to you and your husband.

My guess is that the transfer is intended as a gift, and one inspired by your caretaking—though not necessarily made as payment for your services. Quite commonly, families make this kind of transfer as a sort of expedited inheritance: the caretakers receive what they expect to inherit, but earlier than anticipated. In addition, home ownership can become burdensome to those on fixed incomes or with limited mobility, so these changes in ownership often occur along with the aging process.

However, these transfers can cause family disagreements if your in-laws' intent is not entirely clear. For example, if your husband has siblings or if there are other family members who expect to inherit from your in-laws, it is wise to have your in-laws put in writing why they gifted the house to you.

There are consequences to you are in the form of property taxes and income taxes regardless of why or how you acquired the home. For one, as owners, you will be assessed with and responsible for the property taxes. Similarly, you will be entitled to deduct those property taxes on your income tax return.

You may also be entitled to claim your in-laws as dependents on your income tax return. To claim a dependent who is not your child on your return, that person must either live with you or have a particular relationship to you (parents count), must not make over a certain amount of money (the most recent number on this is a maximum income of $3500), and must count on you for at least half of their support. You can look at the particulars in IRS Publication 501, available at the IRS website or discuss the matter with an accountant.

Finally, if your in-laws receive government benefits, such as Medi-Care, they should make sure that the gift they made to you and your husband doesn't jeopardize those benefits.